Do Indians Really Support Modi's Currency Swap?

Lisa Curtis

Politics, Asia

The real test for Modi comes in the form of five key state elections scheduled for February and March.

On the same day Americans elected Donald Trump to power, Indian Prime Minister Narendra Modi made a surprise announcement: 500 and 1,000 rupee notes (86 percent of Indian currency in circulation) would no longer be valid.

By New Year’s Eve, Modi was praising his fellow Indians for their forbearance in complying with the abrupt move.

The lack of political backlash so far against the BJP government testifies to the depth of political support for Modi, but the real test will come in key state elections to be held in the next two months.

The government justified the demonetization by claiming it would undermine the black market, pervasive corruption, counterfeiting and tax evasion, while helping to digitize the economy. Replacement currency includes a new 500-rupee note and a 2,000-rupee note.

It’s understandable why the government would want to keep the announcement a surprise, but questions surround the implementation of the currency transition and whether the government had amply prepared for it.

Throughout November and December, people spent hours in long queues at banks and ATM machines as they sought to exchange their old currency or deposit it in banks by the December 30 deadline. Some criticize the government for not printing and circulating the new currency fast enough. At the current rate, critics say, it could take anywhere from four months to a year for adequate currency to be circulated in the economy.

The cash crunch has led to a temporary economic slowdown and speculation that it could result in a half to one percent drop in GDP this year. Trade was disrupted, and cash-heavy sectors like agriculture were also negatively impacted. Spending was curtailed, manufacturing slowed and workers were laid off. GDP levels are expected to recover the following year, however.

The surprise demonetization could delay the long-anticipated implementation of a General Sales Tax (GST) until as late as next fall to avoid more economic disruption. Moreover, it is not yet clear to what extent the currency transition has helped to uproot the black market.

Recognizing the difficulties imposed by the currency transition, particularly those within the informal economy, Modi, in his New Year’s Eve speech, laid out new loan and housing programs for the poor and schemes to increase Indian farmers’ access to loans and debit cards.

Demonetization and State Polls